Energy Recovery Inc (ERII) 2009 Q1 法說會逐字稿

Good afternoon ladies and gentlemen, and thank you for standing by. And welcome to the First Quarter 2009 Earnings Conference Call. During today's presentation, all parties will be in a listen only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions)

This conference is being recorded today, Thursday, May 7, 2009. And I would now like to turn the conference over to Mr. Tom Willardson, Chief Financial Officer. Go ahead, sir.

Good afternoon and welcome to Energy Recovery Incorporated's first quarter earnings conference call. Joining me today on the call is G.G. Pique, President and CEO, and Carolyn Bostick, our General Counsel. Today we will discuss the financial results of our first quarter as well as an update of our various strategic initiatives.

In the press release today we provided guidance on our upcoming second quarter and our projected results for revenue, net income and earnings for the full year 2009. Before we begin, I would like Carolyn Bostick, our General Counsel, to make a brief statement about the forward-looking remarks you may hear on today's call. Carolyn?

Thank you, Tom. Please note that our discussion today will include forward-looking statements, which are subject to the Safe Harbor provision of the US Federal Securities laws. We caution you that forward-looking statements about future revenue, growth expectations, market trends, business strategy and new products are predictions based on the Company's current expectations about future events, and are subject to certain risks, uncertainties and other factors that could cause actual results to differ materially.

A detailed discussion of these factors and uncertainties is contained in the reports the Company files with the US Securities and Exchange Commission. ERI assumes no obligation to update any forward-looking statements made during this call except as required by law. Back to Tom.

Thank you, Carolyn. Turning now to our first quarter results, ERI generated net revenue of $12.6 million, a 39% increase over the same period last year. Net income was 1.6 million, a 64% increase over the previous year's net income for the first quarter. I will discuss these results in more detail after G.G.'s remarks. I would now like to turn the call over to G.G. Pique, our President and CEO.

Thank you, Tom. Good afternoon. In the call today I will discuss the near term outlook with our business and the continuing momentum in the global desalinating markets. I will also comment on the market shares we continue to see as a result of the turmoil in the credit markets and how this affects our 2009 prospects. In addition I will also update you on the strategic initiatives.

Following my remarks, Tom will review the financial results of the first quarter in more detail and then I will make some concluding comments. Afterwards we will open up the line to take questions from research professionals. ERI had a very strong 2009 first quarter. We keep managing and growing the business and controlling costs as we have done for the last 28 quarters while continuing to build our team. We are sure that a majority of you are very interested in an update on what is going on out there in the markets and our take on how it affects ERI.

The near term outlook for the desalination plant business continues to be strong. Countries and regions like Israel, Spain, Australia and North Africa have been suffering from severe lack of drinking and irrigation water. Financing for many of the Large Project projects being built today were secure before the meltdown in the credit markets.

Based on the information available to us today, we believe that these projects remain on track for their scheduled completion dates and planned commissioning. Since the market is driven by water scarcity we have not seen Large Project projects being canceled or significantly delayed.

Now deep into this financial crunch, we continue to see several trends we would like to share with you as follows. One major exception to what I just said is one huge project, the Ras Al-Zour project and desalination hydro plant in Saudi Arabia. This have to restructure a $4.2 billion financing package as a result of a change in ownership of the project.

We note that while we are monitoring these developments, none affects our revenue forecast. Although the business of some of our customers has been affected, some clients like [Axshunawa], Matessa in Spain, and Hutchinson Water in Hong Kong are taking this an opportunity to expand their business and are forming new ventures which execute water projects.

Some mega projects have been downsized and broken down into pieces to accelerate their initial production of water. Instead of building the whole project, the developer builds one half or one third now and the rest later. Examples of this are the Brownsfield plant in Texas, [Ninetus Condida] in Chile and the [Bowers] field in China.

The other trends we continue to observe is the reemergence of expansion retrofits. In the case of a water crisis situation existing desalination plants with the intakes and outflow structures already in place are typically the least expensive and quickest way to get more water. One specific example of this solution is the State of Israel where substantially all of the existing plants as well as those under constructions are being expanded by 30%.

This includes the IDE Hadera plant where 30% additional PX units may potentially be utilized. The [Tomikon] plant in Israel is another mega expansion retrofit project where PX devices are being considered to fully or partially replace legacy Energy Recovery technologies such as turbines. The use of our PX devices provide plants the opportunity to double their water production capacity with that new high pressure pump equipment. This ability to get a lot more water from the existing pumps is a major advantage of the PX device expansion retrofit.

The biggest new trend we see is what we call Quick Water. We continue to see a lot of emergency trailers and skids being built by our OEMs which are ending up in Australia, Israel or the Far East. An extension of this concept is the ship-mounted desalination plants being built by Water Standard in the Middle East. These marine plants can be moved to a new location in case of shifts in climate or politics. This Quick Water trade is helping our OEM group in 2009. Our OEM division which covers projects under 50,000 cubic meters per day had a stronger than anticipated 2008 and continues to see a steady flow of business coming from Spain, Israel, the Emirates, Turkey and other parts of Europe.

We see stronger flow of business coming from China because of the government's investment in infrastructure. The OEM Group will also benefit from our latest Energy Recovery product which we plan to launch in a targeted release later this month. This will expand the available market for our OEM Group into low power cost areas where ERI currently has less than a majority market share.

However, as we mentioned in our last two conference calls we see high-end hotel and resort projects in the Caribbean, Egypt and the Maltese being delayed for quite awhile. We are expecting in the overall market for the small OEM desalination plants to shrink in 2009 from last year. However, despite this decline in demand we're projecting that due to the new projects and available markets the 2009 revenue for the OEM Group will be in the same $4 million per quarter [crack] we had in our original 2008 budget.

For our Large Project projects over 50,000 cubic meters per day we have signed contracts and work orders underpin the guidance we provide today. We're still tracking over 160 Large Project projects and several hundred small ones which are planned to be executed over the next two or three years with a total potential revenue for ERI in the $500 million range.

Since our last call we have added to this list new projects in Libya, retrofits in Israel and massive projects coming in China. Most of these are made up of projects are from municipal supply largely sponsor-funded and backed by governments.

For the ERI Large Project projects Israel will be our strongest market this year followed by Australia and India. Also as part of this next expansion wave in desalination projects we still see China emerging as a top desalination market in the world with three million cubic meters per day of this capacity included in the first draft of the countries by year plan.

Projects such as Carlsbad, which were being delayed by California and local municipality politics and environmental issues are now moving ahead. While the majority of these projects are being built on schedule some may be subject to delays beyond our control. Projects may be delayed due to factors already mentioned such as funding delays or the restructuring of project financing and temporary shortage of high pressure pumps, qualified plant designers and construction and operating personnel. We realize that these are unprecedented times and we're monitoring the funding progress of our major customers.

In our press release today we provided guidance in the range of net revenue and earnings for the second quarter and full 2009 year. At this time we have contracts, letters of intent or are in various stages of negotiations for approximately three quarters of the project mega project revenue in 2009 backing our 2009 numbers.

But these projects we have good visibility of approximately six to nine months from a water shipment of a product due to the longer sales cycle. For the smaller projects the sales cycle is much shorter but there's less variability between quarters. As we discussed in the last conference call the fourth quarter tends to be our largest quarter of the year due to the desire of our last customers to take ownership of Energy Recovery devices to recognize procurement fees before December 31st.

As was the case in 2008, we expect the fourth quarter 2009 to be the Large Project best quarter of the year. We continue to see the acceptance and shift to our new flagship product, the PX-260 which yields an 18% improvement in capacity over the PX-220. Sales of the PX-260 represent approximately 80% of the Large Projects revenues in the first quarter.

We expect the percentage of the PX-260 to exceed 75% of 2009 Large Projects revenue as most of our large orders shipped from the PX-220. On the competition front the most interesting news is the recent acquisition of [Colter DWEER] by [Floater] for a reported 34 million in cash plus a potential 11 million in earn outs.

We see this as a re-entry of Floater in a desalination market they dominated for many years and essentially abandoned to focus on oil and gas and power plants. Floater is now paying more than $34 million to buy back in. Despite the change in ownership of Colter, our PX devices continue to have significant advantage over DWEER devices. We are hard at work developing the next generation of pressure exchanger products.

Later this month ERI will offer a new Energy Recovery product, which has been referred to in our public filings as the Comp PX. Field testing of this device began in Egypt in October and the product exceeds all expectations. As a result ERI will be able to compete better in markets where the cost of electricity is either subsidized or relatively low. These markets are currently being served mostly by legacy turbine technologies, which have lower initial capital costs.

By introducing our product in the specific market we aim to gain major market share and provide an affordable solution. We continue testing the PX Titan 1200 device including ongoing beta testing in Mexico. The Titan device is designed to do the work of five PX-220s. We will test for at least another year before we define the commercial strategies.

During our last conference call we introduced Carol Bostick our new in-house General Counsel and Corporate Secretary. Some of you may have observed her work in the proxy and the 10-K. She continues to do some impressive work around the IT of ceramics technology and PX technology.

We have also hired Karen Evans who came to us from Cisco to lead our human resources function as a public company. Her hiring early March completes our executive level team. Finally, as we have been doing for many years, we continue to evolve our core PX technology to offer increased sufficiency flow throughput and other improvements. We will start field testing some new devices within the next 90 days, which will incorporate some new exciting technologies.

As mentioned before, we have entered into a lease agreement covering a refurbished building, which will be used as our new integrated manufacturing facility that will expand our production capacity threefold. This building will also serve as our corporate headquarters and will be used for inventory storage. We are in the process of negotiating a lease amendment that will allow us to co-locate our new ceramics manufacturing facility in this complex. We plan to start moving into this new facility during the fall of 2009 with the goal of beginning graduated ramp up in ceramics production during 2010.

This will allow us to consolidate and integrate into one location all of our original office manufacturing or warehousing needs, which today are scattered among three locations in Oakland and San Leandro and will provide room to grow the company. We have some of the best people in the industry and continue to build on this very talented team by strengthening our HR and IT resources.

As was mentioned in the previous call we feel fortunate that [Paul Kirk] has joined our board. Paul is recognized as one of the pioneers in material sciences. We have been working with Paul regarding our plans to develop and strengthen our expertise in ceramics material science. Our decision to co-locate our green ceramics operations at our new headquarters in San Leandro is a result of this focus. This initiative calls for spending $12 million to $15 million over the next 18 months, which will be funded primarily for more burning cash flows and co-located in our new building.

We continue to be approached with new business ideas in the water and energy space. As we look at these opportunities we are finding that as cash becomes scarce and multiples are marked down by the market, business expectations of asset sellers are becoming more realistic, hence the purchasing power of over $80 million in cash keeps multiplying over time. This cash will become even more valuable later this year as our sell side economic events unfold. And now I would like to turn the call over to Tom to discuss our first quarter results in more detail. Tom?

Thank you, G.G. For the first quarter ended March 31, 2009, we achieved net revenue of 12.6 million, a 39% increase over the same period last year and at the midpoint of the Company's previous guidance range of 12 million to 13 million. The percentage of net revenue derived from mega projects customers was 66% in the first quarter. Our OEM division contributed 3.9 million in net revenue in the first quarter or 30% of the total.

Approximately 93% of our net revenue in the first quarter was generated from sales of our PX devices, recirculation or booster pumps, service and spare parts contributing the remaining 7% of revenue. Sales to foreign customers accounted for 94% of our net revenue for the quarter with shipments to Israel and Australia making up 54% and 14% of the total respectively.

Revenue from customers representing 10% or more of total revenue varies from quarter to quarter. For the first quarter ended March 31, 2009, IDE Technologies, based in Israel accounted for approximately 66% of our net revenue. No other customer accounted for more than 10% of net revenue during the quarter.

Gross profit as a percentage of net revenue was 64% for the first quarter compared to 60% for the same quarter last year. The improvement in gross margin is attributable to the increased sales of the PX-260, our latest flagship product, which provides 18% more flow and commands a premium price over the PX-220. In addition the price increases implemented across all of our product lines last year also contributed to the margin improvement.

For our mega projects division we expect the percentage of PX-260 sales, the total PX sales for 2009 to exceed 70%. Sales and marketing expense, which includes sales commissions and marketing programs was 12% of net revenue for the first quarter of 2009 compared to 15% for the same quarter in the previous year. As commissions are a function of revenue we expect sales and marketing expense in the future to increase in absolute dollars as we continue to grow our top line.

General and administrative expenses consist primarily of personnel in our executive finance and accounting, information technology and human resource organizations as well as fees for professional services including outside legal, acts and audit services. General and administrative expenses decreased to 25% of net revenue compared to 29% of net revenue for the same quarter in the previous year.

During the first quarter we began the initial review and process documentation work preparatory for becoming Sarbanes-Oxley compliant in 2009. We expect to incur third-party consulting expenses of approximately $250,000 in 2009 as we implement, document and test Sarbanes-Oxley policies and procedures. Research and development expenses include costs associated with the design, development, testing and enhancement of our products including know-how related to the production of advanced ceramics used in our products.

The R&D expense for the first quarter increased by 295,000 or 58% to $804,000 from $509,000 compared to a year ago. R&D expenses for the first quarter represented 6% of net revenue for both 2009 and 2008. We believe that continued spending on research and development to develop new PX devices and further our expertise at advanced ceramics is critical to our success and consequently we expect to increase research and development expenses in absolute dollars in future periods.

Non-cash stock-based compensation expense for the quarter was $195,000 and is included in the cost of revenue, sales and marketing, general and administrative and research and development expense lines on the income statement. We expect non-cash based stock-based compensation expense to increase in the future due to options recently granted to our CEO, executive chairman, new directors and employees.

Other net income or expense changed unfavorably by $728,000 to a loss of $102,000 compared to the same quarter last year. The decrease was primarily the result of a reduction in foreign currency denominated contracts and unfavorable changes in foreign currency rates resulting in net foreign currency translation losses of $134,000 for Q1 2009 compared to a net foreign currency transaction gain of 619,000 for the same period last year. Most of our contracts are denominated in US dollars and a few contracts are denominated in euros.

Capital preservation is of paramount importance and substantially all of our IP proceeds are currently invested in short-term US Treasury only money market fund that is yielding a low rate of interest commensurate with the safety of the underlying securities. Net income was $1.6 million for the quarter or $0.03 per fully diluted share compared to net income of approximately $947,000 or $0.02 per diluted share in the first quarter of last year.

The company's effective tax rate for the three months ended March 31, 2009 and 2008 was 38% and 39% respectively. These effective tax rates differ from the US statutory rate principally due to the effect of state income taxes. Turning now to the balance sheet we ended the fourth quarter with no outstanding debt under our revolving credit facility and approximately 84 million in cash, which includes short-term and long-term restricted cash. During the first quarter we moved our primary banking relationship from Comerica Bank to Citibank.

Given our global footprint we chose Citibank as they have an extensive international banking network. Because we transferred the collateral package we had with Comerica to Citibank, we were required to cash collateralize the outstanding standby letters of credit still outstanding and issued by Comerica.

The cash collateral with Comerica is reflected on the March 31st balance sheet as short-term and long-term restricted cash totaling nine million. We are not booking any new letters of credit with Comerica. As these letters of credit mature or expire the cash collateral will be released dollar for dollar to be used for other working capital or acquisition opportunities.

Our revolving credit facility with Citibank is principally used to issue standby letters of credit that underpin our product performance guarantees. Rather than customers holding a portion of our revenue as cash collateral against our performance obligation, we provided irrevocable standby letter of credit as a substitute.

Inventories were $10.1 million or 8.5% of total assets compared to $8.5 million or 7% of total assets at the end of 2008. Our DSOs or days sales outstanding were 115 days for Q1 2009 compared to 119 days for the same period in the previous year. In our press release today we provided guidance for our expected second quarter revenue and earnings results.

The second quarter we are projecting net revenue in the range of $10 million to $11 million and net earnings at break even. For the full year of 2009 we provided guidance of $60 million to $65 million in net revenue. We projected net income in the range of $9 million to $11 million or $0.17 to $0.21 per fully diluted share for the full year.

That concludes my review of the first quarter financial results. Before I turn the call over to G.G. I would like to make our audience aware that ERI is hosting its first analyst/investor day in New York on Wednesday, June 3rd. We have planned a full day of presentations by industry experts as well as our leadership team. Participation by analysts and investors is by invitation only. If you have an interest in attending please contact me or my executive administrative assistant, Denise Hooper. I would now like to turn the call back over to G.G. for some concluding remarks.

Yes, thanks Tom. As you have heard today our industry continues to grow at a very rapid pace and we're solidifying our leadership position as the premier Energy Recovery technology provider in the desalination industry. The factors driving the construction of new desalination plants including population growth, climate change and increasing demand for water for food and power production continue to intensive.

While the worldwide turmoil in the debt markets is affecting almost every industrial sector the need for water is basic and it's a national imperative for most countries. Energy recovery devices like our PX Pressure Exchanger product have made desalination affordable.

During a time when so many companies are feeling the pinch of liquidity due to turmoil in the credit markets, it is a good feeling to have healthy margins and strong operating cash flow and over $80 million of cash in the bank and virtually no debt. We are seeing a continual flow of acquisition and opportunities which could potentially enhance shareholder value. We feel we have developed the best team in the business to manage ERI as well as evaluating, integrating, managing and growing related businesses and technologies on a global basis.

We are also fortunate to have the financial flexibility to move quickly. And I can assure investors that they are represented by a highly experienced and dedicated group of outside directors who are challenging us to optimize our leadership position in our industry. I would now like to turn the call back to the operator and open up the line for questions from research analysts. Joe, thank you.

Thank you, sir.

(Operator Instructions)

And our first question comes from the line of Patrick Jobin with Credit Suisse. Go ahead please.

Thank you. Hi, Tom. Hi, G.G. If I could I just want to get an idea of the timing for the Comp PX product line release? I know you've been testing it. When do you see it entering the market and gaining some share there?

We're a couple of weeks away from launching it.

And when will it be ready to deploy and get specced into these new facilities?

It will be ready in a couple of weeks.

Great. And then one follow up here, when we look at some of your use of cash you said the $12 million to $15 million for your ceramic facility and then possibly other acquisitions. In what industries are you focusing on? Are they going to be also in desalination and maybe when you look at a target or potential investment what do you see as the most opportunistic in this environment?

Yes, we get approached -- we get two ideas a week and the ideas tend to be all over the place. We listen to everybody. We give everybody an hour to submit their idea. But our interest is focused on anything that would fit in a desalination plant and especially pumps. We're interested in any kind of adjacent pump type of technology that we can incorporate or package.

Okay. And then just one last follow up and then I'll jump in the line here. When you're looking at -- let's see here -- when you're looking at, I'm sorry, the future 260 device you're looking at, said correctly, 70% or higher than 70% penetration?

Because the IDE projects were such a preponderant part of our first quarter. It was 80% in the first quarter. But for the year because the OEM Group has a lot of people still buying 220s for the year will probably be closer to 75%.

Good, thanks.

(Operator Instructions)

And our next question comes from the line of Michael Cox with Piper Jaffray. Go ahead please.

Thanks. Good afternoon, guys.

Hi, Michael.

My first question is from the tone of your comments it sounds that you're quite bullish on the outlook. I'd be curious as to the rationale for the downward revision to your full year earnings guidance?

We basically kept our range for net revenues in the same $60 million to $65 million range. A couple of reasons why we took the earnings down just a hair. We made a strategic decision to ramp up sooner than we had originally planned in the ceramics. And the reason for doing that is that we really want to hit the ground running when we start a production in our own facility, in the first quarter of 2010.

So we hired a chief ceramist and he is starting to build up his staff and build a small laboratory so that we can really perfect the ceramics formula before we hit the ground running. That's going to put a little pressure on expenses but we think it's going to pay off for the long run. And then the other thing that has an effect on that were some recent retention options that were granted to management and just with FAS 123R we have to put that into our forecast.

Okay that's helpful. And then my follow-up question I was wondering if you could a sense for the timing of the Port Stanvac project and in general the number of large projects that you plan to deliver product for in 2009?

Let me answer the second one and I have to go back and look at the forecast for the specific one. But probably there's about 12 large projects in 2009 that we're counting on.

Okay but is it fair to say that Port Stanvac is one of those 12?

We don't comment on specific projects for a lot of reasons.

Okay. All right. Thanks.

And our next question comes from the line of Dale Pfau with Cantor Fitzgerald. Go ahead please.

Yes my first question just I missed your comment on your second country there. You said 54% of your revenues came from Israel. What was the second one, Tom? I missed that in the remarks.

That was Australia.

And what was that percentage?

14%.

Okay great. And then for the follow up, which is actually the primary question. If you look across these 160 projects that you see out there that's only maybe 12 of them this year, what is going to be the seminal event that forces more of those to actually come to fruition? Is it going to be the loosing of the credit market? Is it continued drought in Australia? What do you see if you begin to look out there more than a year?

Well driving it is the worsening drought in Israel, Australia and North Africa and also in places like China that are going to be going big time into desalination. But it's driven by water running out.

Great. Thank you.

And our next question comes from the line of Greg McKinley with Doughtery. Go ahead please.

Yes, good afternoon. I guess the first question could be regarding your Comp PX expectations in the OEM market can you just give us a little color on how dependent your OEM market expectations are for the rest of the year on the performance of that new Comp PX product? And how do you feel the company is positioned in terms of selling infrastructure and sort of leads for that product to give you confidence in that view for the rest of the year and then I have a follow up?

Yes, again we're doing very sharp target marketing of the product. We're focusing on areas around the world where power is subsidized, which is the same areas for the turbocharger and the waterwheel have probably better than 50% market share. So we're specifically going up to those markets. We have added new sales people in the Far East. We've strengthened our position in the Middle East, which are the two -- in general those are the two areas. So we actually added headcount in the sales side and we see this being by the second half of the year this will be a significant contributor to the OEM Group.

Okay. And then I guess the second question would be generally on your mega projects what portion of your $60 million to $65 million view do mega projects represent? And then at what point will we start to see financing or contract award activity begin to enhance your 2010 view for mega projects?

Yes, yes again to be consistent in the answer the OEM Group is tracking about $4 million a quarter.

Okay.

We expect them to do about that this year, maybe a little bit better because of the Comp PX. But again, we are launching halfway into the year.

Yes.

So the full impact will be next year. So by deduction you can get to the mega project number.

Sure.

And our next question comes from the line of Ryan Connors with Boenning Scattergood. Go ahead please.

Good afternoon. A couple of questions, first off on the quarterly guidance, Tom, sequentially it suggests a dip from first quarter to second quarter on both the top and the bottom line. Looking back to last year it looks like there's actually a sequential improvement first quarter to second quarter so I wonder if you can just give us a little bit of color around what the dynamics are that will drive that as we go into the second quarter here?

Yes, Ryan, I think it's really mainly timing. The only seasonality we really have is the fourth quarter where for the past several years and we expect it to be for this year and into 2010 the preponderance of orders going to that last quarter just because the summer months there's just less activity as far as receding product. And then as G.G. mentioned, and I've mentioned several times, there's a desire from our customers to get their procurement fees before the end of the year.

So the difference if you're looking at any quarter-over-quarter comparison where you're comparing to previous year I wouldn't read too much into any particular quarter. I certainly wouldn't do a 12-month trend line off of any particular quarter. And that's the reason that we give the yearly guidance to get context to the first three quarters of the year. Sometimes they'll be a little bit lighter and it all depends on timing and the shipping timing for a particular project.

Okay, great. And then just as a follow up not directly related to your business, but G.G. you mentioned on the call there acquisition, a $34 million figure plus some earn outs. We heard some rumors, some figures much higher than that and actually seen figures higher than that published in some industry journals closer to $100 million. I mean are you -- is that number you're quoting a firm number that you're 100% confident in or is that sort of a rumored number as well?

Oh no, actually this is out of their SEC filing. We have to look for it. This is difficult to find but this is right out of the SEC filing. In fact that is -- the number that is published is 45 but then they say there's an $11 million earn out.

Okay that's terrific. Good datapoint. Thanks for your time, guys.

Okay.

(Operator Instructions)

And our next question comes from the line of Jinming Liu with Ardour Capital. Go ahead.

Good afternoon, gentlemen. My first question is related to the effect that G.G. mentioned that you have observed a lot of activity in your retrofit and the expansion. Just for this year how big that market are you looking at?

Yes normally it runs about -- again I take you back in history in 2001 was 90% of our activity. Probably last year was about 10%. This year it could be as high as 20%. We see a lot of activity in Spain and Israel. A lot of places where they have plants and they make water in a hurry.

Okay. My second question relates to your Comp PX. You mentioned that your revenue you expect to see revenue increase later this year. How about the markets? Will this, introduce this product will negatively impact your margins?

No, without going into margins in detail we don't expect it to affect the percentage margin.

Okay. Thanks a lot.

And our next question comes from the line of Debra Coy with Janney. Go ahead.

Hi, Debra.

Hi, G.G. Hi, Tom. Just to follow up on the question on project timing and bookings it seems like that's always a question we come back to. Can you give a sense of when we will know when we've booked -- when you're comfortably in your range? In other words you said that you booked about 70% or 75% of your guidance now. At what point to be sure that you're going to get all those shipments in the fourth quarter to meet the guidance when do you have to have all those orders booked? Is it July, September, when would we expect to know?

We'll have a pretty good idea when we report the second quarter that will be the first week in August. And by the time we hit the middle of the summer we pretty much know what we're going to ship as far as the mega projects between that point in time and the end of the year. So we'll have a very good idea by that time.

Okay, that's helpful. And then just related to that I think one of the difficulties with ERI is the lumpiness quarter to quarter and the heavy backend loading. Of the 12 projects that you feel pretty good about this year and I know you don't comment on them specifically, do you feel like any of them are at risk of slippage? If you lose one or two are you still okay? I guess what I'm asking is what is your level of confidence in the $60 million to $65 million at this point?

Well as I mentioned we're pretty much 75% of the way there. So we just have to lock down the last 25% here over the next 90 days. So we are --

And that's not the entire 12?

Yes there's a whole bunch of things -- yes, there's a whole bunch of things in there that will be basically release over time.

Okay thank you. I'll get back in line.

Right.

And we have a follow-up question from the line of Michael Cox with Piper Jaffray. Go ahead, sir. And it appears Mr. Cox --

I'm sorry. Can you hear me?

Yes we can, Michael.

I'm sorry about that. You comment that for a project that had secured financing before this credit debacle are moving forward. I was just wondering if you could comment on those projects that are pre-financing but in different stages of development? Have you seen any delays or slowdown in the development of projects that would be say 2011 events, that are in sort of the earlier stages?

Yes again, Michael, what we see is the affect of this huge project. I mentioned Ras Al-Zour because that's a 1,500 megawatt power plant with a 1 million cubic meter per day desalination plant. Three quarters of that is thermal and then one quarter seawater (inaudible). The total CapEx for that is $5.4 billion. Now what's happening is that where before you could find bank financing for that, now the Saudi government is going to have to step in through their SWIK subsidiary selling water corporation and do it through -- do it themselves. And it's going to be an EPC project rather than something financed by Sumitomo and GE.

Okay so aside from that one monstrous project everything seems to be going?

(inaudible - multiple speakers) is a good example, (inaudible) did the financial closing on that two weeks ago and that's $500 million. So people are finding $500 million. People are not finding $5.4 billion. And that's the key. That's the key. All of these projects are imminently bankable. They're still going ahead because it's driven by water scarcity. It's not driven by anything else.

Okay. I'd be happy to find $500 million too. My next question is on the China number, the three million cubic meters per day. That's a big number coming out of China. I was just wondering if you could comment on how you see that unfolding?

You know Harry who has the OEM Group has opened an office in Shanghai and we met you there a couple of years ago. And we actually sat down with the people who are putting together the (inaudible). And Tom and I are going to go back in September when the plant is a little bit more finalized and we're going to sit down with the planning people and the government. So again, these are huge numbers that we want to see them firsthand. So we'll be there in September to confirm it.

Okay great. Well thanks again.

And our next question is a follow-up question from the line of Debra Coy with Janney. Go ahead, ma'am.

Thanks. I wanted to come back on the subject of technology. G.G. you mentioned briefly in passing that you had some exciting new technology developments that you were working on at the pilot stage. Can you talk a little bit more about what kind of things you're working on, kind of what it would do, how it would be different than what you have now?

Sure. I can talk about it a little bit because it's not visible in the US patent office yet. But it is visible if you care to look in the European patent office. Basically we have come with the completely different way to do the PX that is more efficient in mixing, which is a measure -- it's a measure of how much saltwater goes into -- brine goes into the incoming freshwater. The mixing is a lot better, much better efficiency, much better throughput. It gets the water in and out a lot quicker. So that technology is part of everything that we're going to put out there and we're testing some of it already and we'll be testing new variations of that over the next 90 days.

So the throughput is more efficient because you've talked about being at peak efficiency on energy recovery?

Yes, yes, it gets to 98% efficiency but also the mixing, which is inefficiencies is brine that it's going through the membranes. That is also a lot better. We get there with using business which is a much better way to do it than anybody else's way. And all of these technologies are being applied to different products that we're already testing and we'll be testing new variations over the next few months.

And you've said you've applied at the European patent office. You'll be applying in the US as well?

It's that the European patent office has a more efficient way to get information out there. The basic information comes from the US patent office but somehow through their trade agreements or whatever they get to publish the information sooner. I guess they're more efficient than we are.

All right. Thanks.

And we have no further questions at this time. I will turn it back to management for any closing remarks.

Well thank you very much, and as a strong reminder we would love to see you guys in New York on June 3rd and we're going to do the opening of the NASDAQ on the next day also. So we'd love to see you in New York. The speakers are tremendous. We are bringing speakers from Australia for the California Energy Commission from California so we're going to give you a very interesting view of the industry. Thank you very much.

Ladies and gentlemen that does conclude your conference for today. Thank you for using AT&T. You may now disconnect.